In the dynamic global trade, building trust between buyers and sellers across borders is crucial but not always easy. With complex regulations, payment risks, and logistics in play, businesses often find themselves seeking reliable ways to secure transactions. This is where a Letter of Credit comes in as one of the most trusted instruments in trade services.
Whether you’re a first-time exporter or an established importer managing multi-million-pound deals, understanding the types of Letters of Credit (LCs) available can help you mitigate risk, ensure timely payments, and boost business confidence on both sides of the trade relationship.
So, which type of Letter of Credit aligns with your business needs? Let’s explore the major types, their features, and how secure LC services can support your growth.
What Is a Letter of Credit?
A Letter of Credit is a formal, written undertaking by a buyer’s (importer’s) bank, known as the issuing bank, to pay a seller (exporter) a specified amount in an agreed currency. The payment is conditional on the seller fulfilling the pre-defined terms and submitting the required documentation within a stipulated timeframe.
By acting as a trusted intermediary, the issuing bank ensures that both parties are protected: the exporter receives assured payment, while the importer is safeguarded against non-performance or shipment delays.
Why a Letter of Credit Matters in Trade Services?
In international commerce, trust takes time, but trade cannot afford delays. Here’s how LC services help:
- Guaranteed Payment: Exporters can operate with confidence, knowing the bank guarantees payment.
- Risk Mitigation: Importers are protected against incomplete or incorrect deliveries.
- Cash Flow Control: SMEs can plan finances better with timed payments and documentation clarity.
- Compliance Assurance: All parties adhere to globally recognised UCP 600 standards, reducing legal and operational risks.
Types of Letters of Credit and When to Use Them
Every international trade transaction is different—what works for a high-volume manufacturer may not suit an SME dealing in seasonal exports. That’s why businesses rely on different types of Letters of Credit, each tailored to specific trade requirements, risk levels, and payment preferences.
Here are the most commonly used types and how they fit into diverse trading scenarios:
- Sight Letter of Credit
A Sight LC is payable immediately once the exporter submits all required documents and they are verified by the bank. It is ideal for businesses that rely on swift payment post-dispatch to maintain liquidity and continue operations smoothly.
Best for:
- Exporters who need quick payments
- Businesses working on narrow margins
- Transactions with new or overseas buyers where upfront assurance is critical
- Usance (Deferred Payment) Letter of Credit
In a Usance LC, the payment is not made immediately. Instead, the importer gets a credit period (30, 60, 90 days, etc.) post-document acceptance. It supports better cash flow management for the buyer while offering exporters the security of future payment.
Best for:
- Importers requiring flexible credit terms
- Businesses with predictable cash inflows
- Long-term vendor relationships based on mutual trust
- Confirmed Letter of Credit
With a Confirmed LC, a second bank, usually in the exporter’s country, adds its own guarantee to the issuing bank’s LC. This ensures payment even if the issuing bank or country faces political or economic instability.
Best for:
- Exporters dealing with high-risk countries
- Businesses transacting with relatively unknown or new buyers
- Scenarios requiring additional assurance for funding purposes
- Transferable Letter of Credit
A Transferable LC allows the original beneficiary (usually a trader or intermediary) to transfer all or part of the payment obligation to another party (e.g., the manufacturer). It’s commonly used in multi-layered trade transactions involving sourcing partners.
Best for:
- Exporters working with sub-suppliers
- Intermediaries coordinating logistics and manufacturing
- Businesses that need flexibility in payment disbursal
- Revolving Letter of Credit
This type of LC is designed for businesses engaged in regular shipments over a long period. The amount resets automatically after each transaction, avoiding the need to re-issue a new LC each time.
Best for:
- Ongoing supplier agreements
- Long-term trade contracts with recurring orders
- Businesses wanting to reduce the administrative burden
- Back-to-Back Letter of Credit
A Back-to-Back LC involves two LCs, one issued in favour of a middleman (intermediary) who uses it to open a second LC in favour of the final supplier. It enables traders to work without tying up large amounts of working capital.
Best for:
- Traders who act as go-betweens for buyers and manufacturers
- Businesses that want to scale up operations using minimal capital
Secure and Reliable LC Services to Power Your Global Trade
A Letter of Credit is only as effective as the trade services backing it. From issuance to settlement, businesses need a banking partner that ensures seamless documentation, swift communication, and full compliance with international norms.
Here’s what secure and reliable LC services should offer:
- Certified Trade Specialists
Navigating the technicalities of LC terms and documentation can be daunting. Having access to Certified Trade Specialists means your business benefits from expert interpretation and guidance throughout the LC process.
- Accurate articulation of LC conditions
- Help with document preparation and submission
- Support for issue resolution and amendments
- Wide Correspondent Bank Network
Speed matters in trade. A well-connected bank ensures faster LC receipt, advising, and transmission by leveraging a wide network of correspondent banks.
- Reduced turnaround time
- Efficient authentication via SWIFT
- Streamlined communication with global partners
- Digital Trade Platform
Modern trade operations demand speed and transparency. Applying for an LC through a digital portal simplifies the process, improves visibility, and reduces paperwork.
- Online LC application via TradeOnNet
- Instant document uploads and tracking
- Error reduction and audit readiness
- Nationwide Accessibility
Whether your business operates from a major metro or a smaller city, having 100% branch access to issue all types of Letters of Credit ensures consistent service quality, regardless of location.
- Uniform availability across the branch network
- Access to helpdesk support for trade-related queries
- Centralised compliance and documentation
Export LC Advising and Confirmation Services
A robust trade services partner also offers additional capabilities such as:
- Export LC Advising: LCs issued by foreign banks through SWIFT are authenticated and advised promptly to the exporter, ensuring smooth receipt and processing.
- Export LC Confirmation: Additional assurance is provided when confirmation is added to LCs from foreign banks offering exporters a guaranteed payment undertaking, even in uncertain markets.
Choosing the Right LC for Your Business
Here’s a quick reference to help you decide which LC suits your trade scenario best:
| LC Type | Ideal For | Key Benefit |
| Sight LC | Quick payments post-shipment | Immediate liquidity |
| Usance LC | Buyers needing credit period | Deferred payment |
| Confirmed LC | Exporters dealing with unstable regions | Added payment security |
| Transferable LC | Traders using sub-suppliers | Flexibility in beneficiary handling |
| Revolving LC | Repetitive shipments | Time and cost efficiency |
| Back-to-Back LC | Intermediary trade transactions | Working capital management |
The Right Partner for Global Trade Confidence
Every trade deal comes with its own risks and requirements. Choosing the right type of letter of credit and the right trade services provider can dramatically improve your cash flow visibility, partner trust, and overall trade efficiency.
If you’re a business seeking secure, reliable, and efficient LC services, choose a provider with certified expertise, digital convenience, and a strong international network. Financial institutions like HDFC Bank offer the capabilities you need to elevate your global trade journey.
